It doesn’t matter if you’ve formed a corporation, LLC, partnership or some other form of entity.  And it doesn’t matter where you’ve formed your entity or for what reason you’ve formed it.  More likely than not, you have a partner or partners (or members or shareholders).  And whether there are two of you or 20 of you, when the business first starts, everyone is of like mind. Everyone gets along.  But inevitably, the business is successful or unsuccessful, and the result is that the partners want more, or they want less. The discussion below outlines legal and business issues that the founders of a new venture may want to consider in structuring relationships with one another.

Partners always want to know who is in charge.  Control of the business entity is sometimes determined by the nature of the partners themselves.  I have one software client with two members.  One member writes the code and one member runs the company and seeks funding. This system works well for them.  On the other hand, I have other clients where the partners are truly equal.  Who’s in charge then?  Even though partners are equal, consideration needs to be given as to whom ultimately makes the decisions.  Deadlock and corporate dissolution is no way to go through a business life cycle.  And the draconian solutions (Dutch Auction, Russian Roulette or Texas Shoot Out) are truly extraordinary solutions that should be avoided at all costs.

One of the other issues that new clients overlook when we talk about their new venture is the outcome of a voluntary or involuntary transfer of ownership interest.  Whether in a Buy-Sell Agreement, a Cross Purchase Agreement or just a good old fashioned shareholders or members agreement, the partners need to decide whether the Company and the other partners have the right to buy out the other partner if they want to (or have to) sell.  What happens if a partner dies, becomes disabled, no longer works full time, gets divorced or goes bankrupt?  The Company and the other partners may decide that that partner’s ownership stake must be repurchased.  And repurchased at some measurable value.  I often counsel my clients through these myriad of decisions.

The final issue that we often discuss at our initial partners’ meeting is the protection of the Company.  I represent the Company and it is just as important to me that the company is protected from the partners themselves.  Protections can take the form of a stock restriction agreement or an employment agreement, but I always recommend that the partners’ ownership interests are subject to vesting and/or repurchase rights based on employment with the Company.  I also want the partners to agree not to compete with the Company, not to solicit its employees or clients to keep all information (IP, business plans and otherwise) confidential and to assign all intellectual property rights to the company.

These are just a few of the considerations that partners should be thinking about.  Of course, every industry is different.  A gym or yoga studio has different needs than a restaurant or software company, but the partners agreeing to work with one another in good faith on issues like these above are universal in every business.  Contact me to discuss your business’s partnering needs.